Government Lifeline Could Provide Relief for American Airlines Stock Holders

Aviation companies aren’t as hot as they were in the back half of 2020 as the Covid-19 pandemic has been stubbornly persistent. With the emergence of variant strains comes more challenges for American Airlines (NYSE:AAL) and its peers in the airline industry, along with a sense of hopelessness for some AAL stock holders.

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But, should AAL stock investors give up hope? It’s hard to make a decision as analysts don’t always agree on the future of the U.S. aviation market. For instance, J.P. Morgan analysts downgraded their ratings on some U.S.-based airlines while recommending “selective profit-taking.”

On the other hand, Deutsche Bank analyst Michael Linenberg suggested that U.S. airline companies could be in for “the greatest demand recovery since World War II in 2021.”

At the same time, Linenberg downgraded AAL and a slew of other airline stocks from “buy” to “hold.” So, before we confuse the matter even further, let’s backtrack and start off with a basic analysis of the price action in AAL stock.

A Closer Look at AAL Stock

Let’s start with the bad news. As of Feb. 19, AAL stock settled at $18.68 per share. On that same day, the company had trailing 12-month earnings per share of -$18.36.

When the earnings per share are nearly the negation of the share price, that’s probably not a good sign. While I’m at it, I should also mention that AAL stock currently offers no dividend.

These facts might be deal breakers for earnings-focused and income-oriented investors. That being said, I encourage you to keep reading as you might still discover reasons to own AAL stock.

At the very least, the bulls can assert that AAL stock is showing signs of a recovery. The Covid-19 pandemic brought the stock price down to a 52-week low of $8.25. Today, the share price is significantly higher than that.

In order to really assert themselves, the AAL stock bulls will need to show some follow-through. Thus, the next price targets for 2021 should be $25 followed by $32.

A Decent Proposal

I promised to deliver a justification for possibly owning AAL stock. I’m not a full-on AAL stock bull, but perhaps a turnaround might be in store.

American Airlines’ savior might come in the form of much-needed relief money. Specifically, on Feb. 11 a U.S. House committee approved a proposal that could give U.S.-based airlines $14 billion in payroll assistance.

That $14 billion, if granted to the airlines, would be in addition to whatever relief funding they’ve already received. And in fact, there’s already a current government funding package that’s set to expire on April 1.

U.S. House Speaker Nancy Pelosi stated that she expects lawmakers to complete legislation based on the $1.9 trillion Covid-19 relief bill, which could include the $14 billion for airlines, by the end of February.

Preventing Devastation

The airline relief proposal covers employee wages and bans job cuts, so it’s a big deal for folks working in the U.S. airline industry.

In a statement, American Airlines admitted that the government-backed payroll support program has been a “lifeline” for the company’s workers.

Therefore, AAL stock holders should keep their fingers crossed and hope that the $14 billion relief proposal passes.

The Air Line Pilots Association, which is the world’s largest pilot union, concisely summed up the desperate need for those funds.

Evidently, the funding “would help prevent the additional financial devastation that would result from the aviation industry being forced to furlough tens of thousands of workers.”

The Bottom Line

Perhaps the government’s assistance will be enough to keep the U.S.-based airlines, and AAL stock, afloat in 2021.

The best strategy for AAL stock investors right now is to hope for the best but prepare for the worst. This would mean keeping tabs on the government funding situation as it develops.

And, it means maintaining a small position size in AAL stock as government-sourced funding – and consensus in Congress – is rarely a sure thing.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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